Debit cards and credit cards offer consumers and merchants alike a great deal of convenience, flexibility and security. They’re virtually identical in appearance, except that most debit cards have the word “debit” printed somewhere on their face. Nevertheless, there are several significant differences between the two.
Immediate vs. Future Payment
The most meaningful difference is transactions completed with a debit card are immediately charged to a checking account. Credit card charges are charged to a credit account that is paid back over time. This is why debit cards are often called check cards since the amount is immediately deducted from a checking account.
If the funds aren’t available in the checking account, or if the charge will exceed the credit card’s available credit, the charge will be declined. Some banks and credit card companies also impose a penalty fee on consumers who try to make such charges.
Debit cards are relatively risk-free to issuing banks because transactions cannot be completed if there aren't sufficient funds
Banks conduct a thorough credit check on credit card applicants, though, because they assume a risk that the customers might not pay the bill. Most banks charge additional fees for credit cards, such as an annual membership fee, a monthly service charge and penalties for late payments. Credit card issuers also penalize late-paying customers by increasing the interest rate on the amount due.
Prepaid Debit Cards
Prepaid debit cards are a convenient way to distribute money. Also called stored-value cards, they’re used just like debit or credit cards for point-of-sale transactions and on-line payments, as well as to get cash from an ATM. They first appeared as gift cards in the U.S. market in the 1970s, and became popular among employers who started using them as payroll cards for their "unbanked" employees in the 1990s. Their growth in popularity accelerated after the turn of the century, as they became commonly available for individual purchase.
There’s no checking account associated with a prepaid debit card as the bank maintains an account whose funds can only be accessed through the card. These accounts can often be replenished, making them alternatives to a checking account. Prepaid debit cards are less strictly regulated than debit or credit cards, though, and are often associated with numerous fees and charges for everything from withdrawing money from an ATM to checking the available balance. This makes a prepaid card a poor choice for emergency money supplies, since when that rainy day comes, the value stored may have been eroded by various fees.
Prepaid cards are not all equal. Shop around before you buy, and select one whose fees and charges will impact you the least. For instance, if you use your card frequently, look for one with no fees for transactions.
Merchants that accept debit and credit cards pay a fee, usually 1 to 2 percent of the transaction amount. Merchants are only charged a flat-rate for debit card transactions, which is capped at 24 cents.
Credit cards offer a much greater degree of protection against unauthorized use than debit cards. Liability for fraudulent credit card charges is capped by law at $50, but liability could be $500 or even more if a debit card is used fraudulently. The actual limit is based on when you report the loss or fraud. In addition, while fraudulent credit card charges are often quickly restored to an account, banks may investigate a debit card fraud report for up to two weeks before they restore anything.